Xponential Fitness, Inc. — Q1 2024 Form 10-Q Summary
Business context and reporting period
Xponential Fitness is a global franchisor of boutique fitness and wellness brands, operating ten concepts across Pilates, cycling, stretching, barre, rowing, yoga, boxing, functional training, dance and metabolic health. The company reported results for the three months ended March 31, 2024, compared with the three months ended March 31, 2023. Xponential owned 65.7% of XPO LLC and reported a 34.3% noncontrolling interest.
The company had 3,156 operating studios globally at quarter-end, including 2,724 in North America and 432 internationally. Franchisees were contractually committed to open 1,914 additional North American studios, while master franchisees were obligated to sell licenses for 1,045 additional international studios.
Financial performance and liquidity
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Total revenue | $79.5 million | $70.7 million | Up 12.5% |
| Operating income (loss) | $7.4 million | $(7.2) million | Improved $14.6 million |
| Net loss | $(4.4) million | $(15.0) million | Improved $10.6 million |
| Net loss attributable to Xponential | $(2.9) million | $(10.0) million | Improved $7.1 million |
| Loss per Class A share | $(0.30) | $(1.38) | Improved |
| Adjusted EBITDA | $29.8 million | $22.9 million | Up 30.4% |
| Operating cash flow | $2.7 million | $11.4 million | Down $8.7 million |
Revenue growth was led by franchise revenue, which increased 26.7% to $41.8 million, and franchise marketing fund revenue, which increased 26.1% to $7.8 million. Other service revenue declined 30.1% to $7.9 million, primarily because the company operated fewer company-owned transition studios.
Operating margin was approximately 9.3% versus negative 10.2% in the prior-year quarter. Net margin was approximately negative 5.5% versus negative 21.2%. Adjusted EBITDA margin was approximately 37.5% versus 32.4%; adjusted EBITDA excludes, among other items, stock compensation, acquisition and transaction expenses, litigation expenses, restructuring charges, the Stride divestiture loss and TRA remeasurement.
System-wide sales increased to $401.1 million from $322.0 million. Last-twelve-month average unit volume increased to $621,000 from $525,000, while same-store sales growth moderated to 9% from 19%. The company reported 111 gross new global studio openings, compared with 116 in the prior-year period.
Cash, cash equivalents and restricted cash were $27.2 million at March 31, 2024, including $10.5 million of restricted cash; management reported unrestricted cash and cash equivalents of approximately $16.7 million. Cash declined by $9.9 million during the quarter. Investing cash outflows included $8.5 million for the Lindora acquisition. Financing cash outflows were $3.4 million, including net debt repayments and preferred dividends.
Total debt principal was $331.4 million, with debt carrying value of approximately $323.9 million. The variable-rate senior secured term loans bore an interest rate of 12.09% at quarter-end and mature on March 15, 2026. Interest expense increased 44.7% to $11.5 million. A 1% change in interest rates would affect annual interest expense by approximately $3.3 million. The company stated that it was in compliance with its debt covenants and believed available cash and operating cash flow would satisfy needs for at least the next twelve months, while noting refinancing and cash-flow risks.
Material changes versus the prior comparable period
- Revenue increased 12.5%, primarily from studio growth, higher franchise activity and increased same-store sales.
- Operating results improved substantially as acquisition and transaction expenses fell to $4.5 million from $15.7 million, largely reflecting lower non-cash contingent consideration expense.
- Interest expense rose $3.6 million because of higher debt balances, higher rates and costs related to credit agreement amendments.
- Operating cash flow fell despite the lower net loss, driven by unfavorable working-capital changes, including deferred revenue, accrued expenses and other liabilities.
- The company acquired Lindora on January 2, 2024 for $8.5 million in cash, plus up to $1.0 million of contingent consideration.
- The company divested the Stride brand on February 13, 2024 without receiving consideration and expects to provide approximately $0.3 million of transition support. It recorded a $0.3 million loss.
- The company continued its restructuring plan to exit company-owned transition studios. It recorded $6.9 million of net restructuring charges in Q1 and had one company-owned transition studio at quarter-end versus 86 a year earlier.
- Stockholders’ deficit increased to $214.3 million from $202.8 million at December 31, 2023. Redeemable convertible preferred stock increased to $122.8 million from $114.7 million due to accretion to redemption value.
Guidance, outlook, commentary and risks
Management expects additional restructuring charges of approximately $16.0 million to $20.0 million during 2024 and estimates annualized gross savings of approximately $13.5 million to $15.5 million once the plan is completed. Timing and ultimate costs depend partly on lease termination negotiations, and cash outflows are expected throughout 2024.
Management identified franchisee recruitment, studio openings, same-store sales, international expansion, consumer discretionary spending, inflation, interest rates and franchisee access to financing as important operating factors. The filing does not provide explicit consolidated revenue or adjusted EBITDA guidance for fiscal 2024.
Material contingencies include a putative employment-related class action with a $0.9 million accrual, a federal securities class action for which the company cannot estimate a loss, a shareholder derivative action stayed pending resolution of the securities case, and an SEC request for information and documents initiated in December 2023. The company cannot currently assess the likelihood or potential magnitude of an adverse SEC outcome.
The company also has approximately $77.2 million of unrecorded Tax Receivable Agreement liability because realization of related deferred tax assets was not considered more likely than not. Other exposures include franchisee lease guarantees of approximately $1.6 million and a $0.2 million accrual related to a standby letter of credit.
Important facts for investors to verify
- Whether studio openings, franchisee health and same-store sales support the reported growth in system-wide sales and franchise revenue.
- Whether the restructuring plan achieves the projected $13.5 million to $15.5 million of annualized gross savings without materially higher lease termination or exit costs.
- Liquidity, interest-rate exposure and the company’s ability to refinance or repay approximately $322.4 million of scheduled debt principal in 2026.
- The potential financial, governance and operational effects of the SEC investigation and securities-related litigation.
- The sustainability of adjusted EBITDA after excluding restructuring, acquisition, litigation, stock-based compensation and other unusual items.
- The impact of Lindora integration, future contingent consideration and the divestiture of Stride on reported and underlying operating metrics.
- Whether the decline in operating cash flow and the company’s substantial accumulated deficit create additional financing or covenant risk.